Spring break
As a fresh university graduate with a chunk of student tax deductions to carry forward into my first year of career income, I drooled over the impending tax return. Cash windfalls are sweet and rare.
We had spent the last several months in Prince Rupert, and the rain was getting to us. Coming from Vancouver, I thought I knew precipitation, but the North Coast sees more than twice the rain of Vancouver. It can be enough to make the soul soggy.
While watching a cowboy movie one spring evening, the ever-present dust on the cattle trail actually looked delicious to us. We literally hadn't seen dust of the outdoor variety since the previous summer, and we strangely longed for something to choke on other than horizontal rain.
The solution for us was a vacation to sunny southern California. I had friends in the area we could visit and the tourist attractions were famously abundant, but the main event was some sun and heat.
We were rewarded with beautiful weather and a memorable experience, but the entire excursion was marred by my own incessant analysis of money.
We had never spent so much on a few days of pleasure, and the entire thing seemed ridiculous to me at the time. I calculated the amount of time we were there and actually enjoying ourselves (by subtracting sleep, travel time, and hours spent tending to our small children). Then I divided the cost of the entire trip among those few precious waking hours of enjoyment, and eventually had a figure in mind of what each breath of California sun was costing me. That hurt, but it might have hurt less if I could have contained myself from announcing it to my patient wife every few minutes.
At one moment, on the Teacup ride at Disneyland, my little adorable three year old daughter looked up at us with and announced with unbounded enthusiasm: "Mommy! Daddy! I'm happy!"
Those sweet words rang true.
"Awe, that's so nice to hear! And the amount of time it took you to utter it only cost me $37.58. But hey, who's counting?"
It should have been my inside voice, but alas...
For those of you interested in the practical financial options for your tax returns, here are a few to consider:
Planning Issues:
When it comes to managing your finances, you probably understand the benefits of saving on a regular basis, but what is equally important, and sometimes forgotten, is ensuring that you and your family are taken care of in the event of your death or disability. The receipt of your income tax refund can be a catalyst to address these common risk management strategies:
1. Meet a lawyer to have a Will and Power of Attorney prepared.
2. Ensure you have adequate disability and critical illness insurance.
3. Ensure you have adequate life insurance.
Education Savings
If you plan to help your children or grandchildren with their education costs, you may wish to use your income tax refund to contribute to a Registered Education Savings Plan (RESP). The first $2,500 of RESP contributions attracts a government grant of $500 - $600 depending on your family income.
Reduce Non-Deductible debt
Consider paying down an outstanding non-deductible debt subject to a high interest rate. Non-deductible debt includes credit card debt, a personal use car loan, and a line of credit used for personal purposes or the mortgage on your home. As the interest on a loan used for personal purposes is not deductible for income tax purposes, you are paying the interest on the loan with after-tax dollars. RRSP or Non-Registered Savings
If you do not have high interest non-deductible debt, then another option for your income tax refund is to save your refund in an RRSP or a non-RRSP account. Whether you should save your refund in an RRSP or non-RRSP account depends on your specific circumstances and several financial assumptions. However, the following general observations can be noted:
If your marginal tax rate in retirement is expected to be the same or lower than your marginal tax rate today, then consider contributing to your RRSP;
Contribute to a Tax-Free Savings Account (TFSA)
The TFSA provides a further option for investing your tax refund. The TFSA allows you to make a $5,500 (indexed to inflation) annual maximum contribution. All growth, income and withdrawals are tax-free. You are also able to gift money to your spouse to invest in a TFSA without being caught by the income attribution rules.
You may be wondering if it is better to invest your tax refund in an RRSP or a TFSA if you are unable to do both; the following general guidelines can help you make the decision.
- Choose the TFSA if your expected marginal tax rate in retirement is going to be higher than your marginal tax rate today.
- Choose the RRSP if your expected marginal tax rate in retirement is going to be lower than your marginal tax rate today.
Emergency Fund
A fundamental financial planning strategy is to have some money set aside for unexpected expenses or a job loss. In general, consider keeping approximately three to six months of living expenses within a liquid emergency fund.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
